This 6.3% Dividend Performer Is On Sale

Published in Company Comment on 12 June 2012

A serial dividend raiser 17% cheaper than four months ago.

When I last wrote about FTSE 250 support services company Carillion (LSE: CLLN) in February, I said: "I'm sure that it could make a decent medium- to long-term investment at the current valuation, but the value seeker in me is likely to wait for one of Mr Market's sale periods..."

That opportunity might just have arrived with recent market weakness leaving the shares at around 267p (market cap: £1.15bn) and yielding 6.3% with last year's payment.

A rising dividend

The company describes itself as one of the UK's leading support services and construction companies, and a 9% dividend hike topped the list of positives in the 2011 full-year results. The updated figures look like this:

Revenue (£m)450442374153
Net cash from operations (£m)175127103
Adjusted earnings per share37.3p39.4p43p
Cash (£m)267397491
Borrowings (£m)242277541

Obvious positives are the rising adjusted earnings per share, dividend and cash figures. However, net cash from operations and borrowings figures have been trending in the wrong direction and warrant further analysis.

Cash flow and debt

Handily, the Consolidated Cash Flow Statement presents a line called "cash generated from operations before pension deficit recovery payments, rationalisation costs and Eaga Partnership Trusts related charges", and at that stage cash flow was about £190m in 2011 compared to about £182m the year before.

The reduced net cash flow figure for 2011 appears to boil down to increased spending on "rationalisation costs", "financial costs" and "acquisition costs", all arguably one-off expenditures.

Carillion increased its borrowings to help fund the acquisition of CES, which it describes as "the largest independent energy efficiency services company in the UK". Gross gearing is now about 50%, which translates to a more comfortable looking 5%-or-so on a net basis, given the company's steadily increasing cash pile.


Recent guidance came with a statement on 2 May. There was a good start to the year with a strong order book and a record pipeline of contract opportunities as reasons for optimism. Indeed, the directors see robust growth opportunities in the Middle East and Canada.

Right now, the shares are on a forward price-to-earnings ratio of around six for 2012, which compares well to peers like May Gurney (LSE: MAYG) on a forward multiple of about seven and Mitie Group (LSE: MTO) on around 12.

At this level, I think the shares are a cautious buy, but it's worth bearing in mind their cyclical nature.

Let me finish by adding that more share ideas can be found within "Top Sectors For 2012" -- a Motley Fool study of three favourable sectors that could offer potential opportunities for long-term investors. The report is free.

Further investment opportunities:

> Kevin does not own Carillion shares.

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duffmanchon 12 Jun 2012 , 8:10pm

Been on my watch list for a while. Wary of the cyclical nature but they seem to have increased the dividend through the last recession so hopefully will continue to do so.

IDPickering 13 Jun 2012 , 8:48am

I jumped the gun with these, having bought in over February & March this year. These form part of my HYP.

OK, unfortunate timing, but I've no intention of selling, and most likely will top up at some point,
but not just yet.

SevenPillars 13 Jun 2012 , 9:32am

How much of its business depends on Government contracts both in the UK and overseas? I suspect that the reason for the share price weakness is that the market sees the potential for fallout from Government spending cutbacks. Eaga's share price collapsed because of this before the Carillion takeover. It is a good company, but I suspect the share price will remain deflated while Government continues to talk austerity in public spending.

tru2me 13 Jun 2012 , 12:30pm

Good points SevenPillars but are the UK politicians also talking up national infrastructure spend or is that just political spin?

snoekie 14 Jun 2012 , 12:19am

I bought @£170 in 04, and it has hardly kept pace with inflation, although the divi has increased.

WarrenBuffer 16 Jun 2012 , 6:06pm

I have liked Carillion in the past and own shares in the company; but what concerns me right now is that their revenues are falling. Never a good sign in my opinion; otherwise I'd be buying more shares in the company right now. . .


ANuvver 19 Jun 2012 , 11:51am

I do like the idea of CLLN as a long-term prospect. Been watching for a while, but just haven't been able to convince myself to bite. Does seem rather a bet on Keynesian splurging.

It also does seem from my experience that, much as with sovereign debt, the closer you sail to 7% yield on equities, the more likely things are to go sproing. Of course, these are exceptional times, with capital markets pulled out of shape in lots of ways.

KevinGodbold 20 Jun 2012 , 6:59pm

That strikes me as a useful rule of thumb to bear in mind, ANuvver; I'll add it to my arsenal. Cheers.

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